Decentralized Finance in Developing Countries: Its Potential and Constraints
By ZOS Lending Network on Altcoin Academy
Decentralized finance also known as DeFi can be used to solve important problems in traditional finance. For example, in various developing countries the access to banking might be physically impossible whilst its asset review and trust mechanism slows down the process of loans and transactions even further.
But if DeFi could be installed efficiently, such constraints can be solved in a much shorter time frame whilst creating the room for new technologies to flourish in countries where banking options are limited. For the rural poor with little access to technology and communication, DeFi gives them an opportunity to improve their livelihood. Whether through entrepreneurship in farming, businesses or other ventures with DeFi available physical access to loans and deposits is not necessary.
Investments and banking methods in developing countries may also be in less developed stages as compared to developed countries i.e financial derivatives and sovereign bonds. But with the availability of DeFi it can give new choices of investments through BTC, ETH or stablecoins this can create new room for investors to store their money elsewhere from traditional banking whilst earnings from speculations of crypto can raise the consumption levels creating a larger middle class and leading more countries into the take-off stage in economic development or could be for future investments into businesses, etc.
As the cryptocurrency market is independent of the Central Bank and its monetary policies this means its value and its economic growth is independent of the economic situation of the country itself therefore it may give greater incentive to invest in crypto where the value and returns are greater than traditional banking (Hence why more people are turning to crypto in Venezuela/Argentina). Furthermore, remittance transfers can also be made cheaper by decreasing the service fees i.e from Western Union and its likely there are restrictions on capital flight (i.e China) but with DeFi such rules do not apply.
In both cases, DeFi and cryptocurrency can work in collaboration and compete with traditional finance and push each other to become competitive markets whereas, in the current situation, the financial market in developing countries are simply in inertia i.e junk bonds with credit rating of BB or less. (URL for map).
Whilst with other uses for blockchain: aid and donation projects related to healthcare, government registry for population census, accountability of funds could be used in order to build from the knowledge of past projects whilst its decentralized ledger would allow transparency and prevent mismanagement of funds. Future projects could have greater effectiveness and coverage if such technology is used efficiently.
Least developed countries known as LDCs (please read: The Bottom Billion by Paul Collier) which have little to no infrastructure may be the easiest place for such systems to flourish as there is no existing foundation to build upon and there is no competing industry against it.
All of this technology if used efficiently can help leapfrog many developing countries into modern society without taking the number of steps which other developed countries have gone through i.e India hardly had any landlines but took off with smartphones.
Constraints
However, it's likely that laws for cryptocurrencies and DeFi regulations do not exist in many developing countries. Hence there is also a greater risk that should investments or speculations create losses or if a crypto/DeFi wallet is stolen there are no laws to prevent anyone accountable. This area will need more regulation in the near future: EU countries are starting to make progress in this area, but from URL out of the 10 sub-Sahara African countries which mention crypto: 9 of them cautions against its uses, whilst only South Africa declares that it will tax earners who also own cryptocurrencies. Note: There are 54 countries in Africa.
Whilst in many developing countries there still exist other problems such as the lack of internet infrastructure and in rural areas, a mobile network may not even exist further compounding the problem. So it could be argued for DeFi and blockchain to be even considered, other infrastructures need to exist in order to make it possible, to begin with. The digital divide which exists in the USA/EU is mainly due to age but in developing countries, it is exacerbated not only by age but also income, rural/urban residence, literacy rate, etc. So DeFi may only benefit the “internet savvy” of the developing world and not the rural absolute poverty which such aid projects are aimed to help. (map URL).
There is no financial inclusion for DeFi if there is a digital divide.
Whilst from the aid organization, some NGOs may not realize the potential of blockchain from the economic (not financial) perspective whilst the time taken and lack of experience to build such a system may also create further costs. i.e every organization has an IT company and technical staff but not every organization has a small team dedicated to blockchain. In order for that to be the “norm” will take years and most people who work on blockchain are related to cryptocurrency (due to higher demand and wages).
Furthermore, though DeFi is important like all other aid projects fighting for grants other projects regarding education, sanitation could be argued to be just as precedent. And as the benefits of those other projects are much clearer and more NGOs are experienced in projects related to education, sanitation it means blockchain may be at a disadvantage.
Another problem is the barrier to entry due to political red tape and corruption which means schedule to build such infrastructure will take longer leading to higher costs. And because laws on blockchain, cryptocurrency don’t exist such projects may not even be allowed to take place.
Furthermore, many people regardless of developed or in developing countries are not educated enough to understand how to use cryptocurrency and blockchain safely.
At best most people in the USA/EU have “heard of it” so it's hard to imagine what the situation is like in developing countries. Furthermore, from hindsight when credit/debit cards were first introduced in China, many people decided against using it as they could not “see” the money transfer hence the distrust and uncertainty about the new system led to its slow adoption. (This is happening to crypto too in developed countries so its possible the adoption would be even slower in developing countries).
Conclusion
Overall, should DeFi be implemented successfully then in developing countries there would be countless benefits from rural financial inclusion to government transparency and population census, whether, in finance, economic and social welfare: blockchain and DeFi can help developing countries leapfrog into modern society.
However, there are still many constraints which need to be considered regarding legality or the current economic infrastructure which exist in such an environment to make it achievable. Whilst from the donor’s perspective, the lack of experience and knowledge to build such infrastructure means there will be many problems during its implementation and even if such systems are built the people who the project aims to help may be unwilling to use something unfamiliar or is simply be used by the younger generation.
This article is an opinion from ZOS
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